Living off of government benefits

There is an article in the UK that describes a family with 8 young children, and the husband quitting his job because the benefits they get from the government are higher. Their take-in is about £815/week which is about £42,380/year, or about CAD$65,100 using current exchange rates.

I do not know whether the numbers are correct, and I highly suspect the article is designed to be inflammatory. I also have no idea what specific social benefits are available in the United Kingdom.

However, I have pondered what somebody in Canada or British Columbia could get if their goal is to minimize work and live off the government. I can’t think of a situation implied like the above article where you effectively have an over 100% marginal tax rate for working. There are situations that come close. There are hypothetical scenarios if your job in life is to maximize government benefits. Note the majority of these use the most current up-to-date 2010 figures, but some 2009 figures may have inadvertently slipped into the following calculations:

1. Assume you have 1 child. This will qualify you for a lot of benefits. It’s also usually better, for government benefits purposes, that you are single as having a significant other making money seriously impairs your ability the claim the benefits discussed below. If you do desire a significant other, do not marry them and live in separate accommodations will maximize the ability to obtain benefits (for you and them!). Having two children will decrease the marginal benefits received compared to having one child.

2. Earn $21,816 in the year. This will qualify you for the following PROVINCIAL benefits:
– Full MSP assistance (free for those under $22,000/year, a $1,224/year annual benefit). I am also assuming no benefit with respect to Pharmacare (which has a lower deductible for lower income individuals).
– Starting July 1, 2010, the BC HST credit (for a family under $25,000/year, a $230/year annual benefit plus $230 for dependent)
– Climate Action Dividend (for a family under $35,843/year, a $105/year benefit, plus $105/year for first child)
– BC Tax reduction credit, essentially a non-refundable reduction in the income tax rate for low income individuals (for $17,354/year, $390/year benefit, reducing by 3.2% above the limit, so in this specific example, $247.22/year benefit)
– BC Child Care Subsidy; while the requirements to qualify are not specific (they do not give a monetary threshold) this would qualify for up to a $750/month ($9000/year) subsidy for early child care. I am not factoring this in to any future calculations in this post.

You will make too much money and miss out on:
– BC Sales tax credit (for a family under $18,000/year, $75/year annual benefit, reducing by 2% above the limit) – I believe this might be phased out with the BC HST credit.

3. A $21,816 income will qualify you for the following FEDERAL benefits:
– Assuming you were working at $21,816/year before having the baby, 50 weeks of Employment Insurance benefits of $230.75/week, or $11,537/year.
– The child will enable you to receive the $100/month Universal Child Care Benefit (UCCB), which is $1,200/year until the child turns 6 years old.
– Federal GST/HST credit (up to $32,506/year income, annual credit amount $631/year with the child)
– Working Income Tax Benefit (WTIB), which is complicated to explain the actual calculation in a sentence, but for a single mother of one child making $21,816/year, works out to a refundable tax credit of $751.28/year.
– Canada Child Tax Benefit and National Child Benefit Supplement and BC Earned Income Benefit – under $23,855/year income, the benefit is $3,528.84/year.
– Canada Learning Bond (CLB), which if you open up an RESP for your child (not frequently done I am sure) will result in a $525 benefit in the RESP immediately, plus $100/year providing you qualify for the National Child Benefit Supplement.

4. Live in social housing or get rental assistance. Although it was difficult to find exact numbers to work with, apparently you can get rental assistance that will net out your rental balance to 30% of your net income. This is also why it is important to keep your income relatively low if your job is to maximize government benefits. If you earn $21,816/year, this will result in an effective rental rate of $545.40/month, which is significantly under market in Vancouver. I am going to take a gross approximation and assume $1,000/mo for a 2-bedroom apartment somewhere in Greater Vancouver which would be a subsidy of approximately $455/mo or $5,460/year.

You add all of this together and get the following results:
a. Excluding EI (which you can claim a credible argument for having paid into the program by virtue of being employed), you will receive approximately $8,252.34/year of either cash payments or payments that are otherwise mandatory that you will not be required to pay; this does not include social housing benefits, and I am excluding the RESP boost since almost nobody will be taking this option.
b. With social housing, that goes up to approximately $13,712/year.

So somebody earning $21,816/year (note: this is about $10.50/hour, full-time 40 hours/week) with a child will be receiving a subsidy of about $13,712.34. This is about 63% of their existing income level. In terms of their income statement, it would be this:

Salary – $21,816
Minus: CPP – $907
Minus: EI – $377
Minus: Income taxes – $0 (none; the child vastly increases the tax credit amounts available to the parent, plus provincial taxes are reduced to zero by the BC Tax Reduction Credit)
Net cash from work: $20,532

Add all of the following:
BC HST Credit: $460
BC Climate Action: $210
UCCB: $1200
GST/HST: $631
WTIB: $751
CCTB and supplement: $3529

Net cash after benefits: $27,313

Minus rent: $6545 (30% of income, assumed to be the “salary” in this case)

Net: $20,768

This is a good sum of money after taxes and rental. Looking at my own personal budget, assuming I had the appropriate rental subsidy as #4 above, I would actually be pulling in a mild surplus. The only real difficulty is the ability to maintain work while taking care of the child at the same time (not easy!).

Now, let’s assume that you earned $35,000/year ($16.83/hour for a 40 hour/week full-time job) as a single parent. This is the most you can earn and still be eligible for social housing benefits. This is how the math would work out:

Salary – $35,000
Minus: CPP – $1559
Minus: EI – $606
Minus: Income Taxes – $1968
Net cash from work: $30,867

We now factor in the benefits:

Minus: MSP – $1224
Add: BC Climate Action – $210
Add: UCCB – $1200
Add: GST/HST – $506
Add: CCTB and supplement – $2185

Net cash after benefits: $33,744

Minus rent: $10,500 (30% of income, assumed to be the “salary” in this case)

Net: $23,244

The difference in earning $13,184 in more pre-tax income will translate into approximately $2,476 in disposable cash after housing rental payments. While the effective marginal tax rate in these circumstances is below 100%, it is quite high (81%).

The quick conclusion that I have is that there is a high level of incentive to work part-time if you are in a middle-wage job if you are single and with a child. For example, if you are working in a clerical type job with a moderate amount of experience, the cost of having to stay at home one, two or even three days a week without pay is not that financially punishing because the government subsidies significantly make up the shortfall. Especially when you net this out with the cost of childcare, it is easy to see how people in BC that value their time more than their money would purposefully keep their income levels below the specified thresholds in order to maximize their government benefits.